NEWSLETTER
Xerxes Nabong, CFP®, CDFA®
Philip M. Maliniak, CRPC®
Nicole Brown-Griffin, CFP®, CDFA®, EA
Aaron Petty, Client Associate
Hampton Roads: (757) 394-3486
Greater Phoenix: (480) 687-9339
Orange County: (949) 660-8869
Wealth Avenue January 2026 Newsletter – Using Roth Strategies to Build Tax-Free Income
Happy New Year 2026! New year, new goals…and one strategy that stays at the top of the list every year: building tax-free income. One of the most powerful tools in long-term wealth planning is taxfree income, and that’s exactly where Roth strategies come into play.
Whether you’re early in your career, in your peak earning years, or approaching retirement, understanding how Roth IRAs, Roth 401(k)/403(b)s, Roth conversions, and the Mega Backdoor Roth work together can materially improve your after-tax retirement outcome.
Below is a clear breakdown of the Roth landscape, what you need to know, and the strategies worth considering.
Why Roth Accounts Matter
Traditional retirement accounts reward you with a tax deduction today but Roth accounts often provide something even more valuable: tax-free growth and tax-free withdrawals later.
Roth accounts:
- Can grow without future tax liability
- Do not increase taxable income when withdrawn (if rules are met)
- Help manage future tax brackets
- Reduce exposure to Medicare IRMAA surcharges
- Provide flexibility around Required Minimum Distributions (RMDs)
In other words, Roth dollars give you control over future taxes and income planning.
Strategy: Rather than choosing all pre-tax or all Roth, many households benefit from tax diversification—holding assets across taxable, pretax, and Roth accounts so withdrawals can be coordinated efficiently year-by-year.
Roth IRA: The Foundation
A Roth IRA is often the starting point for tax-free retirement savings.
Key features:
- Contributions are made with after-tax dollars
- Qualified withdrawals are tax-free
- No Required Minimum Distributions during your lifetime
- Contributions (not earnings) can be accessed penalty-free if needed
- Excellent for retirement income, legacy planning, or flexibility
2026 contribution & income considerations:
- Annual contribution limits apply – $7,500 ($8,600 if 50 and older)
- Direct contributions are limited by income
- 2026 income phase-outs:
- Single and Head of Household: $153,000 to $168,000
- Married Filing Jointly: $242,000 to $252,000
If your income exceeds these limits, direct Roth IRA contributions are not allowed.
Make Too Much Money? Consider the Backdoor Roth IRA
If you earn too much to contribute directly, a Backdoor Roth IRA may be available. This strategy involves making a non-deductible contribution to a Traditional IRA and then converting that amount to a Roth IRA.
Why pre-tax IRAs matter:
- This strategy only works cleanly if you do not have pre-tax IRAs (Traditional, Rollover, SEP, or SIMPLE) in your name.
The IRS “Pro-Rata” Rule:
- When you convert money to a Roth IRA, the IRS does not allow you to choose only after-tax dollars. Instead, it looks at all of your IRAs combined and treats the conversion as coming proportionally from both pre-tax and after-tax money.
This means:
- If you have pre-tax IRA dollars, part of your conversion will be taxable
- You cannot isolate only the after-tax contribution
- The larger your pre-tax IRA balance, the more tax you’ll owe
Simple example:
- You contribute $7,000 (after-tax) to a Traditional IRA
- You also have $93,000 in a pre-tax Rollover IRA
- Total IRA balance = $100,000
- Only 7% of the conversion is tax-free
- 93% of the conversion is taxable income
This often defeats the purpose of the Backdoor Roth strategy.
Strategy: Employer retirement plans create a clean path for Backdoor Roth contributions
- Roll pre-tax IRA balances into a current employer 401(k) or 403(b) (if allowed)
- This removes pre-tax IRAs from your name
- Create a clean path for Backdoor Roth contributions going forward
- You then fund a Traditional IRA with a nondeductible contribution and immediately convert these contributions to your Roth with little to no additional tax impact.
This step is critical and often overlooked.
Roth 401(k) & Roth 403(b): Powerful for High Earners
Many employer retirement plans now offer Roth 401(k) or Roth 403(b) options.
Why these plans are so powerful:
- Much higher contribution limits than a Roth IRA
- Ideal during peak earning years
- Employer matching still goes in pre-tax, creating diversification
- Under current law, Roth employer plans are not subject to RMDs
Important new rule – Beginning in 2026:
- If you are age 50 or older
- Earn over $150,000
- And make catch-up contributions
Those catch-up contributions must be made to the Roth portion of your plan, not pre-tax.
Strategy: For many households, the most effective approach is a blended strategy:
- Pre-tax contributions for current tax relief
- Roth contributions for long-term tax-free income
The right mix depends on your current tax bracket, future income sources, and retirement timeline.
Mega Backdoor Roth: Advanced, High-Impact Strategy
If your employer plan allows after-tax contributions and in-plan Roth conversions, the Mega Backdoor Roth can dramatically accelerate tax-free savings.
For 2026:
- Total 401(k) / 403(b) contribution limit: $72,000
- Limit if age 50+: $80,000
- These totals include:
- Employee contributions
- Catch-up contributions
- Employer matching
After you max traditional or Roth employee contributions, additional dollars can sometimes go in after-tax, then immediately converted to Roth.
Strategy: A simple framework:
- Add up your employee contributions, catch-up (if applicable), and employer match
- Subtract that total from $72k (or $80k if 50+)
- The remaining amount may be filled with aftertax contributions
- Select a contribution percentage that fills this gap over the year
- Convert those after-tax dollars to Roth using in-plan Roth conversions
When available, this strategy can materially increase the amount of money compounding tax-free for retirement.
Execution matters, and not all plans allow it. Coordination with your plan provider (Fidelity, Vanguard, Principal, etc.) for the in-plan Roth conversion is essential.
Roth Conversions: Filling the Low-Tax Years
A Roth conversion moves money from a pre-tax account into a Roth account. Taxes are paid today so future growth can be tax-free. Roth conversions are especially powerful when your marginal tax bracket is temporarily lower.
For retirees who find themselves sitting on a large IRA balance they do not expect, or want, to fully spend, Roth conversions can also serve as a powerful generational planning tool.
Once assets are converted to Roth:
- Growth is tax-free for the rest of your lifetime
- Roth accounts are not subject to Required Minimum Distributions during your lifetime
- Heirs typically receive Roth assets income-tax free (subject to distribution timing rules)
- Future tax risk is shifted from your family to a known, controlled tax cost today
In many cases, paying tax now at a lower bracket can preserve more wealth for heirs than leaving large pre-tax IRA balances behind.
Ideal Roth conversion windows often include:
- Years in the 12% federal tax bracket
- In some cases, the 22% bracket
- Early retirement years before Social Security or pensions begin Years with variable or unusually low income
- Years with variable or unusually low income
A well-planned, multi-year Roth conversion strategy can:
- Reduce lifetime taxes
- Lower future Required Minimum Distributions
- Improve Medicare IRMAA outcomes
- Create tax-efficient assets for the next generation
For retirees focused on legacy planning, Roth conversions are often less about spending the money and more about how efficiently it’s passed on.
Roth Planning Is About Timing
The biggest mistake we see is treating Roth decisions as a one-time choice instead of a multi-year strategy. Roth planning works best when coordinated with:
- Current vs. future tax brackets
- Pension and Social Security timing
- Business or bonus income variability
- Early or phased retirement plans
- Estate and legacy goals
There is no universal “right” answer, only the right answer for your situation.
Next Steps
If you’re unsure whether:
- You should prioritize Roth vs. pre-tax contributions
- Your employer plan allows Mega Backdoor Roth contributions
- You’re positioned correctly for Backdoor Roth IRAs
- Roth conversions make sense in the coming years
We’re happy to review your options and coordinate a strategy that aligns with your full financial picture. One helpful next step is to review your current retirement plan details by locating the Summary Plan Description (SPD) or Plan Highlights, which serve as the rulebook for what your plan allows. Reviewing these documents enables us to evaluate which Roth and after-tax strategies are available and coordinate them with pre-tax savings strategies, Roth IRA contributions (or Backdoor Roths), and other key planning considerations such as your current and future tax brackets, assets held outside of IRAs, income level, and any expected pension benefits.
As always, our goal is simple: to help you keep more of what you earn, now and in the future. Please reach out if you’d like to discuss this sooner, and rest assured this will be reviewed as part of your next strategy review meeting.
Your Team at Wealth Avenue,
**You may tax nontaxable withdrawals from a Roth IRA if you are at least age 59 1/2 and the account has IRA if you are at least age 59 1/2 and the account has been held at least five years. Otherwise, earnings withdrawn may be subject to ordinary income tax and a 10% penalty.**
